Willox said abolishing the dividend imputation system is an alternative to using revenue from the goods and services tax to fund a company tax cut, given indications this week the government may have taken changes to the GST off the tax reform table.

“But it does nothing to restore the lack of competitiveness for foreign investors looking to invest in Australia or for Australian companies looking for opportunities to invest offshore while retaining their Australian base.”

While Willox acknowledged shareholders would be worse off if the dividend imputation system was abolished, he said cutting the rate of corporate tax from 30% to 20% “might be enough to dull the pain” given a large cut to company taxes would deliver benefits in terms of productivity and employment.

He said the proposal could also be made more attractive if a discount was to be applied to the investment income and investment expenses of individual investors.

“This proposal would borrow from our current 50% capital gains discount whereby only half of nominal capital gains is taxed,” he said.

Drawing on a proposal contained in the Henry tax review, Willox said one option would be to tax 60% of individuals’ capital gains, up from 50%, as well as interest and rental income, which is currently at 100%.

At the same time, only 60% of deductions of expenses would be allowed, including interest on funds borrowed for investments.

Willox said the model could be extended to dividend income if the current imputation system was removed.

“This measure would make substantial inroads into the disincentives against saving and investment inherent in our present income tax system,” he said.

“It would simultaneously address the problems associated with negative gearing in a far more systematic and far less discriminatory way than is generally proposed.”

According to a research paper published by Macquarie University economics professor Geoff Kingston last year, abolishing the dividend imputation system could free up $19 billion a year.

While Kingston estimated it would be possible to cut the headline company tax rate from 30% to 20% for large companies if the dividend imputation system was abolished, he said that estimate is based on “strong” assumptions.

“For example, Australian companies are assumed not to revert to the low payout ratios and high gearing that were widespread before imputation,” Kingston said.

“Moreover, eyeballing a scatterplot of recent OECD data suggests that the new headline rate would be more like 25%.”

The tax debate should include all options

Peter Strong, executive director of the Council of Small Business of Australia, toldSmartCompany any move to reduce complexity in the Australian tax system would be welcomed by small business.

But rather than a “piecemeal” debate on tax reform that considers all the options in isolation, Strong says policymakers must “look at the whole system”.

“The GST, dividend imputation, it should all be part of the discussion so we get a tax system that is better, easier and less complex,” he says.

Alex Malley, chief executive of CPA Australia, told SmartCompany all options for tax reform must be fully modelled so the implications of the change are understood.

“Discussions around the income tax treatment of dividends in Australia generally seem to take an all or nothing debate – that is, if a government was to do away with our so-called full imputation system then Australia would return to the bad old days of double taxation on dividends,” Malley says.

“Our full imputation system has delivered significant benefits to Australian investors and the economy over the years. Benefits have included increasing national savings through encouraging greater investment in Australian companies by individuals and superannuation funds, enhancing companies’ ability to raise capital, compete and create jobs, and enabling companies to rely on equity rather than debt for business investment and expansion.”

Malley says changing the imputation system to cut company tax rates will affect different stakeholders in different ways.

“There’s the potential for increasing levels of foreign capital but also profoundly changing the landscape for the retirement savings strategies of all Australians,” he says.

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